In simple terms a mortgage is a loan used to purchase a piece of property. With a regular loan there is no collateral, your ability to repay the loan is analyzed and you are either approved or denied based on that. A mortgage is a bit different in that your house serves as additional collateral for the lender. For most people this is the largest loan they will ever take out, so the lender needs to mitigate their risk by including the home as collateral.
What are the different mortgage types, and which is right for me?
There are a wide variety of loans to choose from, and before we discuss some of the more common options, a good first step is to ask yourself some initial questions:
How long do I plan on living in this house?
How will my life be different in 10 years?
How much cash do I want to keep on hand for other investments?
How much risk am I comfortable taking?
The most common loan type is a fixed rate mortgage. This means your interest rate will be locked in for the length of your loan. The length of the loan can vary based on what you and your lender agree to, but the most common term lengths are 15 and 30 years. The longer the term length the less your monthly payment will be. It is also important to remember that in the first few years the majority of your payment will go towards paying down the interest on the loan. As you proceed more and more of your payment will be used to pay off the principal of your loan.
Another common option is the adjustable rate mortgage or ARM. These mortgages provide a fixed rate for a set period of time (usually 3, 5, 7, or 10 years) and then after that period the interest rate is reset to be more in line with the new current rates. Often times borrowers use this type of loan to get a lower rate initially and hope that they will be in a better place to pay more down the line. There are limits to how much your rate can increase, but borrowers interested in this loan type need to work closely with their lender to make sure they understand all the details about how their loan and monthly payments could change down the road.
Other less common loans include jumbo loans for those borrowing over , VA loans for those who have served in the military, and 203k loans which include renovation costs. Be sure to speak with your lender about the different programs available and find out what works best for you.
Private mortgage insurance (PMI) is an additional fee that gets added to mortgages when the borrower puts down less than 20%. Borrowers who put down less than 20% are seen as a greater risk by lenders, and this additional insurance protects the lender against the borrower defaulting on the loan. Once you have 20% equity in the home you are no longer required to pay the PMI since you are no longer seen as a risky borrower. It is important to know that this insurance does not cover them or their property, but instead it insures the lender against loss. Homeowners insurance is the product you will need to purchase to protect your home against extreme weather, fire, theft, etc…
How much do I have to put down on a house?
For most people 3.5% is the lowest amount you can put down on a house. Veterans, and those who qualify for rural, agricultural loans can actually put down 0%. However it is important to keep in mind that anyone putting down less than 20% will pay an additional PMI on their home. Your lender will be able to discuss your finances with you and figure out what is best for your specific situation.
There are a few different ways to lower your monthly mortgage payment, depending on your current situation. If you are still paying private mortgage insurance (PMI) you can petition your lender to cancel the insurance once you have 20% equity in the home. You may have made enough payments to get to this point, or your home could have gone up in value as a result of market fluctuations, or improvements you have completed. You will need to request a new appraisal to see if that is the case, but that small cost could save you hundreds of dollars a month.
Another common approach is refinancing. Refinancing saves you money by reducing your current interest to today’s rate. There are costs to refinancing, but if you can get a significantly lower rate those costs will pay for themselves over time.
A less common method is to make 1 extra monthly payment each year. This extra payment can be put towards your principal and take years off your mortgage. Some lenders also offer options to modify or reset your loan. You will need to speak with your specific lender to find out if this is an option for you.
USRES Lending is your premier source for everything you need to know about obtaining a mortgage in Southern California. Our parent company has been in the industry for over two decades, and has a wealth of experts who specialize in the Southern California market. Feel free to contact us directly at email@example.com if you have any additional questions. We’re always here to help.
If you’re ready to start the Southern California home buying process you can also request a quote or apply for a loan directly through our website or email us at firstname.lastname@example.org.